Funny, But True Stories: Of All the Gin Joints

This story falls under the What Are the Odds? category. In this case, they were not in my favor. And I got busted.

My intentions were good. I had taken over a manufacturing company and was trying to save it from $1 million loss on one order. This company had one large client, responsible for 60 percent of its revenue. A discount mart, it provided the company with steady work and allowed it to grow significantly.

The discount mart even asked this company to change manufacturing capabilities to suit its needs, and because it was such a large customer, the company invested millions in upgrades so it could print T-shirts in several different ways for the discount mart. The investment seemed to be paying off. However, there was no written contract between the parties.

Until one day. The company had produced $1 million worth of branded/licensed T-shirts, just for this discount mart. Just prior to shipping the large order, the discount mart said, “No thanks.” That’s when the CEO knew he had a crisis, was reviewing his bankruptcy option and sought my help.

I told him it was a good thing he still had the merchandise and could do something with the T-shirts to cut his losses as there was no written contract he would be violating. But the discount mart wouldn’t have it. It was like an old lover. They don’t want you anymore, but they don’t want anyone else to have you either. If we did anything with those T-shirts, they’d say adios forever.

I figured we could still sell them in markets where this discount mart doesn’t compete, so we’d at least get 50 cents on the dollar. The strategy worked and we found a market in South America willing to buy the shirts for enough money to cover our costs and avoid a bankruptcy filing.

Everything would have been fine, except for one thing. The son of one of the discount mart executives vacationed in South America and bought dear old dad a souvenir T-shirt. You guessed it – one of those T-shirts. The discount mart made good on its threat and severed the relationship. I was able to keep the company out of a bankruptcy and the company sold six months later at a significantly reduced price.

The lesson here is about more than T-shirts, however. It’s about never becoming too reliant on a single customer, vendor or product – what I call the Big Gorilla. My rule is if a customer, vendor or product involves 25 percent or more of some part of your business, you’re dealing with the risks of a Big Gorilla…. sooner or later.

Is it Time to Sell Your Business?

Have you been entertaining thoughts of selling your business? Many business owners keep that thought in the back of their head. But if you don’t need the money, why should you sell?

Possible reasons include that you’ve gotten a good offer, you’re ready to retire, you are tired of the risk or you feel it’s time for a change. Or, if you have a family business, there may not be a family member interested in taking over. Whatever the reason you have to explore the option of selling, you’ll want to enlist the right team to value your company correctly and help you make the right decision to get the best price.

Maybe the concept to start your business was entirely your own. But you didn’t build a successful business by yourself — you had a team that most likely included lawyers, CPAs, investors, salespeople and your employees. When it’s time to sell, don’t try to do it alone. It’s time to build another team — one that will ensure you get the outcome you desire.

You would definitely want to include your lawyer, accountant, and an expert on the tax ramifications of the sale. Also consider adding a business consultant, even if you’ve never used one before.

Acquisitions is one of our areas of expertise at GlassRatner. We guide our clients through a process that begins with valuing the company, preparing and presenting the company to the marketplace, weighing offers from potential purchasers while balancing the objectives of stakeholders, and closing with the best possible purchase for that client.

We also work with distressed companies that may have filed or need to file for bankruptcy and need a quick sale.

Whatever your reason for selling, make sure to build the right team for the best possible outcome. It took a team to get where you are, and it will take another one to create a lucrative exit.

For more information on selling a business, please see “5 Mistakes to Avoid When Selling a Business.”

When Bankruptcy is Not the Answer

When a well-known media company previously worth roughly $250 to $300 million files bankruptcy, it makes news. Add in an outed revenge-seeking billionaire financing a lawsuit against the company brought by a pro wrestler/reality TV star over a published tape c of him enjoying some hanky-panky with his friend’s wife, well, now you’ve really got a thriller.

Gawker Media, an online media company and blog network owned by Nick Denton, filed for bankruptcy last Friday. The filing came after the company lost a $140 million lawsuit brought by the flamboyant former pro wrestler Hulk Hogan over excerpts of a tape of him and his friend’s wife Gawker posted on its site.

Peter Thiel, who made his fortune with PayPal and Facebook, funded the lawsuit, calling it one of his most philanthropic efforts, as well as many others in what is seen as an act of revenge over many Gawker posts about him, including one in 2007 with the headline “Peter Thiel is totally gay, people.”

In this instance, filing bankruptcy may have been the only option for Gawker, as insurance doesn’t cover the $140 million judgment, and the company wanted to protect its assets from seizure.

Odds are really good you won’t find yourself in this situation. But you may be considering filing bankruptcy. That is one option I discuss with clients when their companies are in dire straits.

However, there are several other avenues to explore first and many reasons not to take this step, as outlined in my post The Downsides of Bankruptcy. These include the expense, the damage to your company’s reputation and the loss of control.

While bankruptcy is one tool used to protect assets, it’s not the only one and requires careful consideration of the alternatives. At GlassRatner, we look beyond the obvious choices and consider the optimum strategies to help you and your business.

 

 

 

The Downsides of Bankruptcy

The parent company of Reader’s Digest magazine recently filed for Chapter 11 bankruptcy the second time in less than four years. The U.S. arm of Atari, the video game maker that brought the world the classic game “Pong,” also recently filed for Chapter 11.

Even though it won an Academy Award this year for best visual effects for “Life of Pi,” the visual effects company Rhythm & Hues filed for bankruptcy.

Despite these high profile filings, the American Bankruptcy Institute recently reported that commercial Chapter 11 bankruptcies actually fell a whopping 36 percent from January 2012 to January 2013, from 749 to 479.

Although the decrease in bankruptcy filings may be partly a result of the slowly improving economy, it’s also due to the fact that companies are increasingly looking to alternatives to filing bankruptcy. It’s no longer assumed to be the leading default option for companies in financial distress.

In my work as the Turnaround Authority, I generally discourage my clients from declaring bankruptcy. While bankruptcy does offer several tools that may not otherwise be available, such as the ability to sell assets free and clear of liens and claims, and the ability to accept and reject contracts, I want companies to carefully consider the downsides to bankruptcy before making that move. Here are just a few I want them to consider.

It results in loss of control. While the client may still be running the daily operations, he is no longer in control of the major decisions. The judge approves all major decisions.

It’s expensive. High attorney fees can actually result in businesses being forced to liquidate to pay all the fees. Fees in excess of $1 million dollars are not uncommon. Companies have paid in excess of $1,000 an hour during a bankruptcy reorganization.

In addition to paying for its own lawyers and financial advisors, the company has to pay those of the creditors’ committee and the secured lenders.

The law firm Weil, Gotshal & Manges was lead counsel for the Lehman Brothers bankruptcy, raking in $389 million in fees and expenses in 3 ½ years. But that wasn’t all of it. The total paid out to all of the firms on Lehman’s tab? More than $1.4 billion.

An interim CEO or Chief Restructuring Officer, like me, may be brought in to handle the process, which adds another layer of costs.

It harms the company’s reputation and may discourage future investments. Just a rumor about the impending filing of Chapter 11 bankruptcy by American Airlines parent company AMR caused the shares of stock to plummet by a third and 67 million frequent flyer members fretted over what would happen to their miles.

Owners and stockholders may lose a great deal of money. The bankruptcy court determines the order in which creditors are paid back, with secured creditors first in line. Stockholders are always at the back of the line and generally need to invest additional funds into the restructured entity in order to maintain equity in the new company.

The actions of the firm’s leadership are closely examined and may lead to criminal charges. After Enron filed for bankruptcy, dozens of its executives were subsequently charged with criminal acts that included insider trading, money laundering and fraud.

I tell this story in my new book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOS’ Mistakes.” I was brought in as an interim CEO for a company that had filed for Chapter 11. On its books was $50 million of inventory at a plant in Ireland. I decided to go take a look. Turns out the plant was actually a vacant lot, but had been claimed as inventory to inflate the value of the company so it could qualify for a larger loan than it would have.

Few companies emerge intact. Less than 10 percent of companies filing for bankruptcy protection emerge as they were when they filed. Generally, assets, divisions, or the entire company are sold to provide the funds to work out a Plan of Reorganization.

Bankruptcy is a viable and helpful alternative for some companies. I’ve worked with many over the years and was successful in bringing them out of bankruptcy.  But it’s difficult and takes time and money. It’s not the best tool for every company and alternatives should be carefully considered.

We Shouldn’t Bail Out Europe – We Should Turn It Around

I’ve been writing a lot lately about Greece, which is representative of the larger problems Europe is having right now. My interest lies in the fact that an organization (in this case a country or group of countries) is spinning out of control in crisis and has little or no idea how to fix things. I think that they need a turnaround guy’s help, or at least his attitude.

I know that there are differences between companies and countries, namely, the number of factors involved. What do I mean by that?

At a company, you can quite often say, If I do x, y will occur. The reason is that there are a limited number of factors involved. I can look at the numbers on a Balance Sheet; I can comb over a P&L. I can say, if we stop spending in these places, the cash saved can pay for the following. With those payments made (generally debt and required expenses), the business can stay afloat, avoid further crisis, ultimately pay its debt down, and emerge to become profitable again. It’s not that easy and requires a lot of creativity and negotiation, but there’s rarely a case I can’t figure out.

Unlike in a country, in a private company you can sell off assets, which is a great way to generate cash you don’t have (in contrast, countries tend to just print money, which is creating an asset they don’t have and that devalues the other assets they do have). Greece, for instance, can’t sell off Thessaloniki. Well, maybe it could, but I don’t know that Romania would pay the asking price (Turkey might).

In addition, in a private company, you don’t have to worry (as much) about gauging people’s reactions. Of course you want buy-in and for the people to be on your side, but at the end of the day, whatever must be done to survive must be done. If it’s not, and the business collapses, the people are laid off and must go elsewhere. If the people in a country disagree with the decision makers, riots can ensue alongside, potentially, political mayhem and anarchy. After all, the people are assumed to comprise the country and therefore be responsible for the debt. If the government dissolves, the people are still there, the country is still there and the debt still, arguably, exists. In business, there’s bankruptcy. In governments, not so much.

As a turnaround professional, I look at all of these country-based crises, and I see the opportunity to turn them around. It would certainly be exceedingly complex and involve unpredictable elements at that level, the likes of which we don’t usually see in companies, but it’s the attitude that’s needed – an attitude that doesn’t seek to make more money out of no money, but one that embraces austerity and survival at all costs.

So without further ado, I’d like to show you a great animated video that does a delightful job summing up the European debt crisis and the proposed solutions. Watch it and tell me we don’t need a turnaround guy in there:

http://www.guardian.co.uk/business/blog/2011/oct/28/euro-debt-crisis-animated-explanation

What did you think?

Dr. Freud Says, “You’re Distracted!”

Life is distracting. I know it, and you know it. Hey, it’s life, and we have to relish the distractions. Life isn’t business, after all. Business is a part of life.

When the distractions include the marriages of our children, moving to new homes, graduations, holidays and everything else that comes with life, that’s great – and we probably shouldn’t call those distractions. We should call them life.

But in my line of work I don’t find that it’s this part of life that either results in or compounds the troubles of a turnaround.

I Give Up

I got a call the other day from a client who said, “Lee, I think I’m just going to file for bankruptcy tomorrow. I can’t keep up with this, and I don’t know what to do. It’s too overwhelming, and I’m done.”

It was at that point that I lit my  cigar (not really, I don’t smoke) and asked my client to lay down on his couch (we were, after all, on the phone, and I couldn’t very well have him laying on my couch).

I’ve learned over the years that my job is – in large part – the job of a psychoanalyst. I have to break through what a client is telling me is bothering him and get down to what the real problems are.

Let’s Go Deeper

As I asked my client to tell me what was really going on and what was really overwhelming him, he said that the business was the problem: payroll wasn’t going to get paid, creditors were barking at the door and everyone seemed despondent. Those are pretty standard problems in a turnaround – after all, it’s what I was doing there in the first place.

But why all of a sudden could he not handle the pressure and the issues? Why did he want to give up and file for bankruptcy when I’d told him that we would get through this turnaround without the need?

As it turns out, the issues weren’t really about the business. I pushed a little more and learned that this client’s father’s health had just taken a bad turn and that he was having other problems at home.

He was prepared to handle the issues the business was facing because he knew I was there at his side to take care of them, but what he wasn’t prepared for was handling the business and the rest of life’s more challenging distractions at the same time.

He didn’t realize that I was there to support him through those issues, too.

Have Someone to Turn to

No – I didn’t become his drinking buddy or commiseration pal, but I did use my Dr. Freud skills to listen to his issues and show him that whatever else was happening, he could place the burden of his business on me. It would be my problem to bear in the meantime because that’s what I do best.

When you find that work has become too overwhelming – especially when things are going wrong – consider the fact that you may be distracted by a lot of life’s other challenges. Maybe you should talk to someone and maybe you should lean on some of the key people in your life to take the burden off of you.

How do you deal with distractions and focus when you really need to?

Not Keeping It in Your Pants can be Very Expensive

Here’s something stupid that CEOs, presidents and business owners do: they fail to keep it in their pants.

The biggest case in recent memory concerned the dear old president of these United States, William Jefferson Clinton – or Ol’ Willy as the stories will one day be told.

His failure to keep it locked down had to do with so many issues: his ego, his self esteem, his power, and the simple urges of simple men – or for short, men. Interestingly enough, it’s these same forces – ego, esteem, power and manly urges – that drive men to start companies and become presidents in the first place (money could be added to the list, too), but that’s no reason to get led around by your lesser brain.

If for no other reason (and when I’m talking about neglecting reasons I include things like the sanctity of marriage, practical morality, metaphysical morality, putting your family or business first, etc.) than to avoid getting caught, do not cheat on your wife or spouse while running a company.

Don’t cheat on them anyway but especially if you’re running a company it’s a bad idea. You will get caught – especially if your company is facing a crisis.

It always comes out . . . and not in the way to which you may have grown accustomed.

What’s worse is that these issues always have a way of arising when things are already headed south . . . and not in the way to which you may have grown accustomed.

I was dealing with a guy who was originally in the business of manufacturing apparel. He couldn’t keep focused on his core business, however, because he had a dream of designing the perfect yacht.

Lucky for him, he succeeded in making such a great yacht that he ended up on the cover of a major yachting magazine for his unbelievable hull design.

Unlucky for him, when he and his yacht were photographed for the cover shoot his scantily clad girlfriend, simply busting with joy and enthusiasm, ended up on the yacht in the background of the photo.

When his wife saw the cover of the magazine, she filed for divorce and took the company with her. After all, the business was started with her daddy’s money.

Another quickie, so to speak. The CEO and Chairman of the Board of a retail establishment – in the middle of his company’s bankruptcy – got caught with his kids’ babysitter. The messiness that ensued caused him to lose focus on the company’s issues, which ultimately had to be sold off in pieces.

Both of these men (and I’ve got 20 more of these stories) lost everything – businesses, money, families, and the lives they had built – because they couldn’t keep it in their pants.

Not keeping it in your pants can be very expensive.

Know anything about this and want to share a story?